Offset Account vs Term Deposit — Which Is Better? (Australia 2026)
If you have a home loan and spare savings, you have a key decision to make: should you park cash in your mortgage offset account — or lock it into a term deposit for a guaranteed interest rate?
The answer depends on your tax bracket, your home loan rate, and whether you need access to the funds.
The Core Difference
| Offset account | Term deposit | |
|---|---|---|
| How it works | Savings sit against your loan, reducing interest charged | Cash locked for a fixed term at a fixed interest rate |
| Return | Saves interest at your home loan rate | Earns interest at the TD rate |
| Tax | Tax-free — you don’t earn income, you save interest | Taxable — interest income taxed at marginal rate |
| Flexibility | Fully accessible — withdraw anytime | Locked in for term (penalties for early exit) |
| Requires a home loan | Yes | No |
| Guaranteed return | Yes (as long as loan exists) | Yes (fixed for the term) |
The Numbers: After-Tax Comparison
Assumptions (April 2026):
- Home loan variable rate: 6.00%
- Term deposit rate (12 months): 5.00%
- Amount: $50,000
Offset account:
- Interest saved per year: $50,000 × 6.00% = $3,000
- Tax payable: $0 (you’re not earning income — you’re saving interest)
- After-tax benefit: $3,000
Term deposit at 5.00%:
- Interest earned per year: $50,000 × 5.00% = $2,500
- Tax payable (varies by bracket):
| Tax bracket | Marginal rate | Tax on $2,500 | After-tax TD return |
|---|---|---|---|
| ≤$18,200 | 0% | $0 | $2,500 (5.00%) |
| $18,201–$45,000 | 19% | $475 | $2,025 (4.05%) |
| $45,001–$120,000 | 32.5% | $812 | $1,688 (3.38%) |
| $120,001–$180,000 | 37% | $925 | $1,575 (3.15%) |
| >$180,000 | 45% | $1,125 | $1,375 (2.75%) |
Medicare levy (2%) also applies — effective rate is 2 percentage points higher for most earners.
The Break-Even Analysis
At a 6% home loan rate, the after-tax equivalent return from the offset is 6.00%. The term deposit must deliver the same after tax to match it.
Required TD gross rate to match a 6% offset (before tax):
| Tax bracket | Required TD gross rate |
|---|---|
| 0% (nil tax) | 6.00% |
| 19% bracket | 7.40% |
| 32.5% bracket | 8.89% |
| 37% bracket | 9.52% |
| 45% bracket | 10.91% |
In April 2026, term deposit rates of 10%+ are not available — which means for virtually all taxpayers with a 6% home loan, the offset account delivers a better after-tax return.
When the Term Deposit Wins
There are genuine scenarios where a term deposit is the better choice:
You don’t have a home loan. Without a mortgage, an offset account has no purpose. A term deposit (or high-interest savings account) is the right home for short-term savings.
You are a renter or have no offset-eligible loan. Some basic variable and fixed rate loans don’t have offset accounts. If you can’t get an offset account, a term deposit competes with a high-interest savings account.
You are in the lowest tax bracket. If your marginal rate is 0–19% and the TD rate is close to your loan rate, the difference narrows significantly.
You have more savings than your loan balance. The offset benefit is capped at your outstanding loan balance. If you have $400,000 in savings but only $200,000 remaining on your loan, the offset can only work on $200,000.
You want to ringfence savings from spending. Some people find that money accessible in an offset account gets spent — a term deposit provides a psychological lock.
When the Offset Account Wins
For most Australian home loan borrowers in the 32.5%+ tax bracket:
- The offset delivers a higher after-tax return than any available term deposit
- The funds remain fully accessible for emergencies
- There is no lock-in period — no break penalty
- The benefit compounds as every dollar in offset reduces interest daily
Practical Considerations
Package loan annual fees: Most offset accounts require a packaged home loan, which typically costs $350–$395/year in annual fees. Factor this in — on a small balance, the fee may erode the offset advantage.
Example: $20,000 in offset at 6% = $1,200/year interest saving. Minus $395 annual package fee = net benefit: $805. A term deposit at 5% on $20,000 = $1,000 gross, minus 32.5% tax = $675 net. Offset still wins.
At very small offset balances (e.g., $5,000–$10,000), the package fee may narrow the gap significantly.
High-interest savings account alternative: If your loan doesn’t have offset, compare a high-interest savings account (some offer 5.00–5.50% with conditions) — though these rates are often promotional and may require minimum monthly deposits or other conditions.
Frequently Asked Questions
Can I have both an offset account and a term deposit?
Yes — some borrowers maximise their offset balance and then park additional savings beyond the loan balance in a term deposit. This is a reasonable approach.
Does the offset benefit apply on a fixed rate loan?
Generally no — most fixed rate home loans in Australia do not allow a linked offset account. This is a major limitation of fixing if you have significant savings.
Is offset interest saving counted as income for tax purposes?
No — you are saving an expense (interest), not earning income. There is no tax payable on interest savings from an offset account.
Related Guides
- What Is an Offset Account?
- How Offset Accounts Work
- Offset Account vs Extra Repayments
- Should I Fix My Rate or Go Variable?
- Should I Pay Off My Mortgage or Invest?
- Mortgage Repayment Hub
This article provides general information comparing offset accounts and term deposits in Australia. Tax rates and term deposit rates change regularly — verify current rates from your lender and the ATO. This is not financial advice. For advice tailored to your situation, speak with a licensed financial adviser. Find one through MoneySmart.